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Aug. 7th, 2012 08:41 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
hypermozek
Wall Street banks are increasingly telling counterparties and borrowers to restructure contracts or find another bank as they prepare for the potential exit of a country from the eurozone.
Using hedges, such as credit default swaps, US banks have reduced their net exposure to troubled eurozone countries. But they are also engaged in more work behind the scenes to ensure that if a country leaves the eurozone they will not have to receive payments in a devalued drachma or peseta.
No bank has dramatically adjusted its exposure to the five countries, betting that gross positions, which range from $5.4bn at Morgan Stanley to more than $20bn at JPMorgan Chase, are manageable.The eurozone continues to be the predominant concern of US bank executives, ahead of the faltering US recovery. Last summer the worsening of the eurozone crisis produced wild swings in US banks’ stock prices and led the Securities and Exchange Commission to demand they provide more disclosure of assets in Spain, Greece, Italy, Ireland and Portugal.
An analysis of regulatory filings since then showsJPMorgan Chase, Bank of America, Citigroup,Morgan Stanley and Goldman Sachs have generally trimmed their exposure but the picture is not uniform.
But machinations in the eurozone continue to feed back to US banks. Last week the speculation on whether Mario Draghi, European Central Bank president, would take more aggressive action to tackle the crisis produced further gyrations in US stock prices.
One senior Wall Street executive said his bank was approaching derivatives counterparties to say: “‘We’ve got this contract, it’s in euros, what I want to know is in the event that Spain were to be redenominated are we going to end up being adversaries on this or can we just agree that this is a euro contact? Let’s just move it to London law so we each agree that we know where we stand.’
“If they don’t … when that contract matures there’s not going to be any roll-over.”
Most derivatives contracts already use law for English or New York courts which, lawyers and bankers believe, are likely to insist that a counterparty from a country that has left the euro continues to make payments in euros rather than with a devalued new currency.
A trader heading a eurozone crisis unit at another US bank said counterparties were being told to use collateral that could not suddenly switch from the euro to a new currency.
“You can make sure you post collateral that has less redenomination risk,” he said.
Investors are not only having to deal with banks’ preparations for a eurozone break-up but make their own. Some hedge funds have stopped trading with Greek counterparties.
Securities linked to corporate issuers and denominated in euros should still have enforceable contracts while the euro still exists, said one hedge fund chief financial officer. For government debt, it becomes a matter of “unenforceability”, he said.
Banks not running from Europe
Investors are building a picture of how Wall Street banks treat their assets in Europe based on five quarters of data collected by the Securities and Exchange Commission, which recently asked for more detail, writes Tom Braithwaite.
Perhaps the most notable element is what has not changed. Despite dire predictions of European financial meltdown, there is little sign of dramatic flight from Greece, Italy, Spain, Portugal and Ireland.
A lack of consistency from banks’ reporting makes the picture harder to interpret. Goldman Sachs, for example, provided only its credit exposure in the first two quarters it reported. After that, Goldman’s exposure appears to have increased. But it has merely provided a fuller disclosure by including its exposure to trading positions in those countries.
Other banks’ numbers vary as they note changes to SEC guidelines on disclosing hedges. Bank of America, for example, has not decreased its hedging as the data suggests. But the bank is not counting some hedges as effective at bringing down the net exposure level.
Overall, the trend is clear: while banks are adding hedges and shrinking exposure, it is nothing like a run from the continent.
You can read both optimism and pessimism into this: optimism from those executives who maintain that an orderly resolution to the crisis is still the most likely outcome; pessimism from those who believe the headline exposures are not what will wreak havoc if all goes wrong.
Sentiment can tilt again, but for the moment, investors have paid little attention to the numbers. Morgan Stanley, which the statistics show is the least exposed bank, has been lumbered with a share price much more correlated to eurozone developments than rivals such as JPMorgan Chase, which has the most exposure to peripheral countries at more than $20bn.
There is also a deficiency that the SEC cannot force banks to fix and which the Federal Reserve and other regulators have trouble dealing with: the numbers are for direct exposure only; indirect exposure is a murkier and yet probably more significant game.
Mike Mayo, analyst at CLSA, notes that MF Global, the broker-dealer, fell into bankruptcy last year after a big bet on the eurozone went awry. Nowhere in their regulatory disclosures did banks record their exposure to MF Global even though it was a potentially more noxious source of eurozone contagion than, for example, a manufacturer in Italy.
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